[Seungseop Song's Financial Light] Commercial Banks Rise · Savings Banks Fall... The 'Loan-to-Deposit Ratio' That Determines Interest Rates?

Loan-to-Deposit Ratio as a Factor in Interest Rate Determination
Why Interest Rates Change Depending on Commercial and Savings Bank Conditions

[Asia Economy Reporter Song Seung-seop] Finance is difficult. Confusing terms and complex backstories are intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Nevertheless, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be grounded. Therefore, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these ‘light’ stories that turn on the ‘light’ of finance.

Average interest rate of savings bank fixed deposits on the 31st.
Photo by the Korea Federation of Savings Banks

Everyone wants to put money into accounts with high interest rates. They want to borrow money at low interest rates. But how are bank interest rates, that is, interest rates, determined?

Interest rates are determined by numerous factors. The ‘ye-dae-yul’ (loan-to-deposit ratio) is one of them. Ye-dae-yul means the ratio (%) of loans to deposits. You can understand it as ‘(loans/deposits)*100’.

For example, if Bank A has deposits of 1 million won and has loaned out 2 million won, Bank A’s ye-dae-yul is 200%. Conversely, if the deposits are 2 million won and loans are 1 million won, the ye-dae-yul is 50%. In other words, a bank with a high ye-dae-yul has lent out more money compared to the deposits it holds, and a low ye-dae-yul means the loans are less compared to the funds it has.

The ye-dae-yul must be maintained at an appropriate level. If the ye-dae-yul is excessively high, it can be seen as a signal that the bank has recklessly increased loans, and if it is too low, it means the bank has not properly utilized its funds.

Interest Rates Fluctuate According to Ye-dae-yul

But who sets the appropriate ye-dae-yul? In Korea, since June 2012, the Financial Services Commission has set and enforced it. Commercial banks cannot exceed a ye-dae-yul of 100%, but currently, due to COVID-19 and other reasons, it has been temporarily relaxed to 105% until June. Savings banks managed their ye-dae-yul at 110% until last year, but from this year, they cannot exceed 100%.

The reason ye-dae-yul affects interest rates lies here. Currently, commercial banks and internet-only banks have seen an increase in loan demand due to COVID-19, but fewer people are depositing money because of the low interest rate trend. In other words, since the ye-dae-yul is high, they need to reduce loans or gather more deposits. Many analyses suggest that the recent launch of high-interest special products by major commercial banks last month or the recent increase in deposit interest rates were to gather funds necessary for managing the ye-dae-yul.

The situation is a bit different for savings banks. Savings banks have also seen a large increase in loan demand due to COVID-19, but at the same time, a lot of funds that could not find investment destinations due to the low interest rate trend in the first-tier financial sector flowed in. Moreover, the ‘parking account’ craze at savings banks, where interest accrues even if money is deposited for just one day, has increased deposits, so there is no need to raise account interest rates. This is the reason why commercial banks’ account interest rates are rising, while savings banks’ account interest rates are falling.

This content was produced with the assistance of AI translation services.